-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GB3yF6NH846NTUftarXeRWM7BiNw3WuLXuZjOR6DdkyWzRDSFZqq2LCJSKgb/xzd kMZ/qgrBvWy8c0lI0hAYrA== 0000701345-96-000044.txt : 19961118 0000701345-96-000044.hdr.sgml : 19961118 ACCESSION NUMBER: 0000701345-96-000044 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: USAIR GROUP INC CENTRAL INDEX KEY: 0000701345 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 541194634 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08444 FILM NUMBER: 96662950 BUSINESS ADDRESS: STREET 1: 2345 CRYSTAL DR CITY: ARLINGTON STATE: VA ZIP: 22227 BUSINESS PHONE: 7034185306 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USAIR INC CENTRAL INDEX KEY: 0000714560 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 530218143 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08442 FILM NUMBER: 96662951 BUSINESS ADDRESS: STREET 1: 2345 CRYSTAL DRIVE CITY: ARLINGTON STATE: VA ZIP: 22227 BUSINESS PHONE: 7034187000 10-Q 1 3RD QTR 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 USAir Group, Inc. (Commission file number: 1-8444) and USAir, Inc. (Commission file number: 1-8442) (Exact names of registrants as specified in their charters) Delaware USAir Group, Inc. 54-1194634 (State of incorporation USAir, Inc. 53-0218143 of both registrants) (I.R.S. Employer Identification Numbers) USAir Group, Inc. 2345 Crystal Drive, Arlington, Virginia 22227 (Address of principal executive offices) (703) 418-5306 (Registrant's telephone number, including area code) USAir, Inc. 2345 Crystal Drive, Arlington, Virginia 22227 (Address of principal executive offices) (703) 418-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At October 31, 1996, there were outstanding approximately 64,180,000 shares of common stock of USAir Group, Inc. and 1,000 shares of common stock of USAir, Inc. The registrant USAir, Inc. meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore participating in the filing of this form with the reduced disclosure format. USAir Group, Inc. and USAir, Inc. Quarterly Report on Form 10-Q Table of Contents
Part I. Financial Information Page ---- Item 1A. Financial Statements - USAir Group, Inc. Condensed Consolidated Statements of Operations -- Three Months and Nine Months Ended September 30, 1996 and 1995 1 Condensed Consolidated Balance Sheets -- September 30, 1996 and December 31, 1995 2 Condensed Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 1996 and 1995 4 Notes to Condensed Consolidated Financial Statements 6 Item 1B. Financial Statements - USAir, Inc. Condensed Consolidated Statements of Operations -- Three Months and Nine Months Ended September 30, 1996 and 1995 11 Condensed Consolidated Balance Sheets -- September 30, 1996 and December 31, 1995 12 Condensed Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 1996 and 1995 14 Notes to Condensed Consolidated Financial Statements 16 Item 2. Management's Discussion and Analysis of Financial 18 Condition and Results of Operations Part II. Other Information Item 1. Legal Proceedings 34 Item 3. Defaults Upon Senior Securities 34 Item 5. Other Information 35 Item 6. Exhibits and Reports on Form 8-K 35 Signatures 37
Part 1. Financial Information Item 1A. Financial Statements
USAir Group, Inc. Condensed Consolidated Statements of Operations Three Months and Nine Months Ended September 30, 1996 and 1995 (unaudited) - -------------------------------------------------------------------------- (in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1996 1995 1996 1995 ------------- ------------- ------------- ------------- Operating Revenues Passenger transportation $ 1,885,792 $ 1,687,824 $ 5,520,502 $ 5,078,439 Cargo and freight 39,701 37,889 117,944 118,306 Other 147,074 147,704 452,030 423,063 ------------- ------------- ------------- ------------- Total Operating Revenues 2,072,567 1,873,417 6,090,476 5,619,808 Operating Expenses Personnel costs 810,282 730,145 2,351,826 2,179,066 Aviation fuel 188,321 154,223 532,394 477,666 Commissions 147,088 135,400 440,225 431,222 Aircraft rent 116,378 108,718 321,641 329,738 Other rent and landing fees 105,839 105,308 311,539 310,506 Aircraft maintenance 75,446 83,287 265,903 264,928 Depreciation and amortization 77,411 87,912 238,072 263,978 Other, net 420,450 375,775 1,240,793 1,148,937 ------------- ------------- ------------- ------------- Total Operating Expenses 1,941,215 1,780,768 5,702,393 5,406,041 ------------- ------------- ------------- ------------- Operating Income (Loss) 131,352 92,649 388,083 213,767 Other Income (Expense) Interest income 21,732 13,562 51,409 32,553 Interest expense (66,456) (75,065) (201,409) (228,521) Interest capitalized 2,280 758 5,702 7,730 Equity in earnings (loss) of affiliates 9,791 9,234 31,102 27,781 Other, net (19,486) 8,332 (20,091) 12,137 ------------- ------------- ------------- ------------- Other Income (Expense), Net (52,139) (43,179) (133,287) (148,320) ------------- ------------- ------------- ------------- Income (Loss) Before Taxes 79,213 49,470 254,796 65,447 Provision (Credit) for Income Taxes 11,475 6,414 18,576 6,414 ------------- ------------- ------------- ------------- Net Income (Loss) 67,738 43,056 236,220 59,033 Preferred Dividend Requirement (22,338) (21,415) (67,134) (63,044) ------------- ------------- ------------- ------------- Net Income (Loss) Applicable to Common Stockholders $ 45,400 $ 21,641 $ 169,086 $ (4,011) ============= ============= ============= ============= Income (Loss) per Common Share Primary $ 0.69 $ 0.35 $ 2.58 $ (0.06) Fully-diluted $ 0.60 N/A $ 2.15 N/A Shares Used for Computation (000) Primary 65,838 62,571 65,457 62,143 Fully-diluted 95,754 N/A 95,373 N/A See accompanying Notes to Condensed Consolidated Financial Statements.
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USAir Group, Inc. Condensed Consolidated Balance Sheets September 30, 1996 (unaudited) and December 31, 1995 - ---------------------------------------------------- (dollars in thousands, except per share amounts) September 30, December 31, 1996 1995 --------------- -------------- ASSETS Current Assets Cash and cash equivalents $ 655,447 $ 881,854 Short-term investments 631,114 19,831 Receivables, net 410,293 322,122 Materials and supplies, net 250,600 248,144 Prepaid expenses and other 138,035 111,131 --------------- -------------- Total current assets 2,085,489 1,583,082 Property and Equipment Flight equipment 5,275,700 5,251,742 Ground property and equipment 1,091,620 1,073,720 Less accumulated depreciation and amortization (2,464,773) (2,301,059) --------------- -------------- 3,902,547 4,024,403 Purchase deposits 64,261 17,026 --------------- -------------- Property and equipment, net 3,966,808 4,041,429 Other Assets Goodwill, net 498,524 510,562 Other intangibles, net 302,389 312,786 Other assets, net 518,618 507,149 --------------- -------------- Total other assets 1,319,531 1,330,497 --------------- -------------- $ 7,371,828 $ 6,955,008 =============== ============== LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Current maturities of long-term debt $ 94,727 $ 80,721 Accounts payable 380,546 325,330 Traffic balances payable and unused tickets 844,353 607,170 Accrued expenses 1,421,787 1,471,475 --------------- -------------- Total current liabilities 2,741,413 2,484,696 Long-term Debt, Net of Current Maturities 2,625,790 2,717,085 Deferred Credits and Other Liabilities Deferred gains, net 366,555 386,947 Postretirement benefits other than pensions, non-current 1,076,688 1,015,623 Non-current employee benefit liabilities and other 464,070 427,726 --------------- -------------- Total deferred credits and other liabilities 1,907,313 1,830,296
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USAir Group, Inc. Condensed Consolidated Balance Sheets September 30, 1996 (unaudited) and December 31, 1995 (Continued) - ------------------------------------------------------------------ (dollars in thousands, except per share amounts) September 30, December 31, 1996 1995 --------------- -------------- LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT) (Continued) Commitments and Contingencies Redeemable Cumulative Convertible Preferred Stock Series A, 358,000 shares issued, no par value 358,000 358,000 (redemption value of $417,181 at September 30, 1996) Series F, 30,000 shares issued, no par value 300,000 300,000 (redemption value of $331,429 at September 30, 1996) Series T, 10,000 shares issued, no par value 100,719 100,719 (redemption value of $110,044 at September 30, 1996) Stockholders' Equity (Deficit) Series B cumulative convertible preferred stock, no par value, 4,263,000 depositary shares 213,153 213,153 issued (liquidation preference of $250,455 at September 30, 1996) Common stock, par value $1 per share, authorized 150,000,000 shares, issued and outstanding 64,216 63,449 64,216,000 and 63,449,000 shares, respectively Paid-in capital 1,385,139 1,362,756 Retained earnings (deficit) (2,144,991) (2,298,211) Deferred compensation (100,929) (98,847) Adjustment for minimum pension liability (77,995) (78,088) --------------- -------------- Total stockholders' equity (deficit) (661,407) (835,788) --------------- -------------- $ 7,371,828 $ 6,955,008 =============== ============== See accompanying Notes to Condensed Consolidated Financial Statements.
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USAir Group, Inc. Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 1996 and 1995 (unaudited) - --------------------------------------------------------- (in thousands) Nine Months Ended September 30, ------------------------------- 1996 1995 ---------- ---------- Cash and cash equivalents beginning of period $ 881,854 $ 429,538 ---------- ---------- Cash flows from operating activities Net income (loss) 236,220 59,033 Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities Depreciation and amortization 238,072 263,978 Loss (gain) on disposition of property (889) (13,762) Amortization of deferred gains and credits (20,749) (20,704) Other 42,560 (2,847) Changes in certain assets and liabilities Decrease (increase) in receivables (88,171) (130,595) Decrease (increase) in materials, supplies, prepaid expenses and intangible pension assets (42,453) (12,221) Increase (decrease) in traffic balances payable and unused tickets 237,183 204,348 Increase (decrease) in accounts payable and accrued expenses 4,762 72,086 Increase (decrease) in postretirement benefits other than pensions, non-current 61,065 55,455 ---------- ---------- Net cash provided by (used for) operating activities 667,600 474,771 Cash flows from investing activities Aircraft acquisitions and purchase deposits, net (37,231) (49,675) Additions to other property (105,711) (55,561) Proceeds from disposition of property 15,503 154,174 Change in short-term investments (603,983) 21,994 Change in restricted cash and investments (2,347) 330 Other (10,821) (1,421) ---------- ---------- Net cash provided by (used for) investing activities (744,590) 69,841
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USAir Group, Inc. Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 1996 and 1995 (unaudited) (Continued) - ------------------------------------------------------------------------ (in thousands) Nine Months Ended September 30, ------------------------------- 1996 1995 ---------------- --------------- Cash flows from financing activities Issuance of debt 103,002 1,162 Reduction of debt (211,942) (118,174) Issuance of common stock 2,523 8,315 Dividends paid (43,000) - ---------------- --------------- Net cash provided by (used for) financing activities (149,417) (108,697) ---------------- --------------- Net increase (decrease) in cash and cash equivalents (226,407) 435,915 ---------------- --------------- Cash and cash equivalents end of period $ 655,447 $ 865,453 ================ =============== Noncash investing and financing activities Issuance of debt - refinancing of debt secured by aircraft $ 159,998 $ - ================ =============== Reduction of debt - refinancing of debt secured by aircraft $ 154,422 $ - ================ =============== Issuance of debt - aircraft acquisitions $ 26,075 $ 162,125 ================ =============== Reduction of debt - aircraft purchase deposits $ - $ 70,837 ================ =============== Underwriter's fees - refinancing of debt secured by aircraft $ 2,488 $ - ================ =============== Dividends declared, but not paid $ 40,000 $ - ================ =============== Supplemental Information Cash paid during the year for interest, net of amounts capitalized $ 219,270 $ 243,410 ================ =============== Net cash (received) paid during the year for income taxes $ 7,254 $ 4,609 ================ =============== See accompanying Notes to Condensed Consolidated Financial Statements.
5 USAir Group, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (1) Basis of Presentation The accompanying Condensed Consolidated Financial Statements include the accounts of USAir Group, Inc. ("USAir Group" or the "Company") and its wholly-owned subsidiaries USAir, Inc. ("USAir"), Piedmont Airlines, Inc., PSA Airlines, Inc. (formerly Jetstream International Airlines, Inc.), Allegheny Airlines, Inc. (formerly Pennsylvania Commuter Airlines, Inc.), USAir Leasing and Services, Inc., USAir Fuel Corporation, Material Services Company, Inc. and The OR Group, Inc. (the "OR Group"). USAir's accounts include its wholly-owned subsidiary USAM Corp. ("USAM"). The OR Group was incorporated in February 1996 and is a wholly-owned subsidiary of USAir Group. The OR Group provides resource allocation consulting services and decision-making support systems to USAir, which is currently OR Group's only customer. USAir has announced that it will terminate its Airline Technical Services, LLC joint venture with a subsidiary of British Airways Plc, effective January 1997. Airline Technical Services, LLC, a Delaware limited liability company, was formed during the fourth quarter of 1995 for the purpose of offering joint aviation maintenance, and technical and engineering expertise in the Americas. Amounts related to this joint venture included in the Company's financial results for the first nine months of 1996 are immaterial and no material charges are expected to result from its termination. Management believes that all adjustments necessary for a fair statement of results have been included in the Condensed Consolidated Financial Statements for the interim periods presented, which are unaudited. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain 1995 amounts have been reclassified to conform with 1996 classifications. These interim period Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (2) Income (Loss) Per Common Share The Company includes the effects of assuming conversion of all dilutive stock options and convertible equity instruments into common stock when calculating fully-diluted income (loss) per common share. For the three month period ended September 30, 1996, approximately 1,625,000 6 incremental shares were included in the calculation as the result of applying the treasury stock method to the Company's outstanding stock options. For the same period, the effects of assuming conversion of the Company's Series F Cumulative Convertible Senior Preferred Stock ("Series F Preferred Stock"), Series T-1 Cumulative Convertible Exchangeable Senior Preferred Stock ("Series T-1 Preferred Stock"), Series T-2 Cumulative Convertible Exchangeable Senior Preferred Stock ("Series T-2 Preferred Stock") (the Series T-1 and Series T-2 Preferred Stock are collectively referred to as the "Series T Preferred Stock"), and the Series B Cumulative Convertible Preferred Stock ("Series B Preferred Stock") were dilutive and therefore included in the calculation. The income and share effects of assuming conversion of these preferred stock issuances were approximately $12,144,000 and 29,916,000 shares. The effects of assuming conversion of the Company's 9 % Series A Cumulative Convertible Redeemable Preferred Stock ("Series A Preferred Stock") were antidilutive and therefore excluded from the calculation. For the nine month period ended September 30, 1996, approximately 1,510,000 incremental shares were included in the calculation as the result of applying the treasury stock method to the Company's outstanding stock options. For the same period, the effects of assuming conversion of the Series F, Series T and Series B Preferred Stock were dilutive and therefore included in the calculation. The total income and share effects of the dilutive preferred stock issuances were approximately $36,404,000 and 29,916,000 shares. The effects of assuming conversion of the Series A Preferred Stock were antidilutive and therefore excluded from the calculation. (3) Redeemable Preferred Stock On October 25, 1996, the Company paid dividends of $40.0 million on its outstanding Series A, Series F and Series T Preferred Stock (collectively the Company's "Senior Preferred Stock"). The Company also paid dividends of $43.0 million on its Senior Preferred Stock during August 1996. Prior to the August 1996 payment, the Company had deferred the payment of dividends on all of its outstanding preferred stock issuances effective with dividend payments due September 30, 1994. The Company's capital surplus as of September 30, 1996, as calculated in accordance with Delaware General Corporation Law based on the Company's Condensed Consolidated Balance Sheets, was $33.1 million. This surplus amount includes the effect of the October dividend payment, which was accrued as of September 30, 1996. The Company's outstanding Series B Preferred Stock is junior to the Company's Senior Preferred Stock and is not eligible to receive dividends until the deferred dividends on the Senior Preferred Stock are paid in full and all Senior Preferred Stock dividend payments are current. There can be no assurance of when or if the Company's Board of Directors will declare additional dividends on the Company's outstanding capital stock. After the October dividend payment, accumulated deferred dividends on all of the Company's outstanding preferred stock issuances, including penalty dividends thereon, totaled approximately $97.9 million. 7 (4) Stockholders' Equity On May 22, 1996, the Company's stockholders approved the 1996 Stock Incentive Plan ("1996 Plan") and the Nonemployee Director Stock Incentive Plan ("Director Plan"). With the approval of the 1996 Plan, 3.1 million additional shares of USAir Group Common Stock ("Common Stock") were authorized for the granting of stock options and/or restricted stock. In conjunction with the 1996 Plan, 2,745,000 additional shares of Common Stock were reserved for the granting of stock options and/or restricted stock as of September 30, 1996. With the approval of the Director Plan, 70,000 shares of Common Stock were authorized for the granting of stock options to nonemployee directors of USAir Group. As of September 30, 1996, 15,000 shares of Common Stock were reserved for the granting of stock options under the Director Plan. (5) Amendment of the 1992 Stock Option Plan In September 1996, the Human Resources Committee of the Company's Board of Directors amended the 1992 Stock Option Plan ("1992 Plan") to permit the granting of stock appreciation rights ("SARs") in tandem with the options under this plan. The Committee further amended the 1992 Plan to include the grant to all option holders of one SAR for each outstanding option held effective November 1, 1996. For each SAR, the holder is entitled to receive the difference between the fair market value of a share of USAir Group Common Stock and $15. The exercise of any SAR cancels its tandem option. Conversely, the exercise of any option cancels its tandem SAR. The SARs have the same expiration date as the tandem options. (6) Nonemployee Director Retirement Plan The Retirement Plan for Outside Directors of USAir Group, Inc. was terminated as of December 31, 1995. Pursuant to such termination, (i) no individual who first becomes a director on or after December 31, 1995 will participate in the retirement plan and (ii) directors as of December 31, 1995 will be credited with units of phantom stock of the Company ("deferred stock units" or "DSUs") equal in value to the present value of their accrued benefits as of December 31, 1995 based on the average price of the stock in the month of December 1995. Such DSUs will be paid in cash following the director's termination of service. On May 22, 1996 the Company's stockholders approved the Nonemployee Director Stock Incentive Plan (see Note 4 for additional information) providing for an annual grant of 1,500 stock options. As of January 1, 1996, the Company established the Nonemployee Director Deferred Stock Unit Plan, pursuant to which each nonemployee director will receive an annual grant of 500 DSUs. These stock options and DSUs will vest after the director serves a full one-year term. USAir Group reversed approximately $93 thousand from its Adjustment for minimum pension liability (an element of Stockholders' Equity (Deficit)) in conjunction with the termination of the Retirement Plan for Outside Directors of USAir Group, Inc. 8 (7) Select Financial Information - USAM Investments USAM owns 11% of the Galileo International Partnership ("GIP"), approximately 11% of the Galileo Japan Partnership ("GJP") and approximately 21% of the Apollo Travel Services Partnership ("ATS"). USAM accounts for these investments using the equity method. The following is summarized financial information for GIP and ATS (combined, in millions):
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- (Unaudited) (Unaudited) Service revenues $ 370 $ 327 $ 1,114 $ 1,004 Cost and expenses 304 271 898 823 ----- ----- ------- ------- Net earnings $ 66 $ 56 $ 216 $ 181 ===== ===== ======= =======
USAM received distributions from GIP and ATS of approximately $2.8 million and $41.9 million (including a special distribution from ATS of $33.7 million during the second quarter of 1996 which represented a distribution of cash to partners), respectively, during the first nine months of 1996. USAM received distributions from GIP and ATS of approximately $1.8 million and $9.1 million, respectively, during the first nine months of 1995. (8) Non-Recurring Items Results for the first nine months of 1996 include two non-recurring items recorded by USAir during the second quarter of 1996 related to its non-operating British Aerospace BAe-146-200 ("BAe-146") aircraft. USAir reached agreements to sublease eleven BAe-146s during the second quarter. Both non-recurring items resulted in credits to Operating Expense categories. USAir reversed $22.5 million of previously accrued rent obligations related to these aircraft against Aircraft Rent expense and reversed $7.0 million against Aircraft Maintenance expense related to previously accrued lease return provisions. (9) Subsequent Event On November 6, 1996, USAir announced that it has entered into an agreement-in-principle with AVSA, S.A.R.L., an affiliate of aircraft manufacturer Airbus Industrie ("Airbus"), regarding the possible acquisition by USAir of up to 400 Airbus A319, A320 and A321 narrowbody aircraft (collectively, the "Airbus Aircraft") for delivery to USAir between 1997 and 2009. Completion of the transaction is dependent upon USAir achieving a competitive cost structure. The proposed transaction, if consummated, would be comprised of 120 firm Airbus Aircraft and 120 Airbus Aircraft to be reconfirmed by USAir at a future date. In addition, USAir would have the option to acquire up to 160 additional Airbus Aircraft with open-ended delivery dates, USAir would have the flexibility in selecting among the 122-seat A319, the 144-seat A320 and the 168-seat A321, depending upon projected industry conditions at the time final delivery schedules were set. 9 The agreement-in-principle with Airbus is subject to several conditions. Included are Board of Directors approvals, reaching a definitive purchase agreement and related documentation with Airbus and USAir reaching a satisfactory arrangement with one or more engine manufacturers. The Airbus Aircraft are presently intended as, at a minimum, replacement aircraft for USAir's existing fleet of McDonnell Douglas DC-9-30 and MD-80 aircraft, Boeing 737-200 aircraft, and Fokker F-28-4000 aircraft, all of which are intended to be disposed of by USAir. The Company has not yet determined whether consummation of the Airbus transaction and the disposition of the aircraft intended to be replaced would require the Company to recognize an "impairment loss" in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." (this space intentionally left blank) 10 Part 1. Financial Information Item 1B. Financial Statements
USAir, Inc. Condensed Consolidated Statements of Operations Three Months and Nine Months Ended September 30, 1996 and 1995 (unaudited) - -------------------------------------------------------------------------- (in thousands) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1996 1995 1996 1995 --------------- --------------- ------------- --------------- Operating Revenues Passenger transportation $ 1,739,074 $ 1,561,583 $ 5,093,175 $ 4,724,470 Cargo and freight 38,671 36,923 115,066 115,658 Other 146,312 144,300 449,028 419,627 --------------- --------------- ------------- --------------- Total Operating Revenues 1,924,057 1,742,806 5,657,269 5,259,755 Operating Expenses Personnel costs 771,279 691,925 2,237,314 2,077,828 Aviation fuel 178,260 146,811 504,728 456,319 Commissions 137,090 126,110 410,854 404,269 Aircraft rent 103,009 98,295 285,931 300,500 Other rent and landing fees 101,263 101,428 298,417 299,146 Aircraft maintenance 62,099 70,306 222,710 226,497 Depreciation and amortization 73,511 84,007 226,508 252,157 Other, net 400,779 357,626 1,176,383 1,092,326 --------------- --------------- ------------- --------------- Total Operating Expenses 1,827,290 1,676,508 5,362,845 5,109,042 --------------- --------------- ------------- --------------- Operating Income (Loss) 96,767 66,298 294,424 150,713 Other Income (Expense) Interest income 22,041 13,385 51,522 32,158 Interest expense (71,255) (75,931) (213,323) (225,526) Interest capitalized 2,280 758 5,702 7,730 Equity in earnings (loss) of affiliates 9,791 9,234 31,102 27,781 Other, net (19,931) 6,220 (20,302) 9,930 --------------- --------------- ------------- --------------- Other Income (Expense), Net (57,074) (46,334) (145,299) (147,927) --------------- --------------- ------------- --------------- Income (Loss) Before Taxes 39,693 19,964 149,125 2,786 Provision (Credit) for Income Taxes 11,646 3,365 15,440 3,365 --------------- --------------- ------------- --------------- Net Income (Loss) $ 28,047 $ 16,599 $ 133,685 $ (579) =============== =============== ============= =============== See accompanying Notes to Condensed Consolidated Financial Statements.
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USAir, Inc. Condensed Consolidated Balance Sheets September 30, 1996 (unaudited) and December 31, 1995 - ---------------------------------------------------- (dollars in thousands, except per share amount) September 30, December 31, 1996 1995 --------------- -------------- ASSETS Current Assets Cash and cash equivalents $ 653,893 $ 879,613 Short-term investments 631,114 19,831 Receivables, net 417,097 321,755 Materials and supplies, net 217,535 222,245 Prepaid expenses and other 124,391 97,922 --------------- -------------- Total current assets 2,044,030 1,541,366 Property and Equipment Flight equipment 5,043,310 5,021,520 Ground property and equipment 1,069,618 1,052,706 Less accumulated depreciation and amortization (2,377,058) (2,222,814) --------------- -------------- 3,735,870 3,851,412 Purchase deposits 64,261 17,026 --------------- -------------- Property and equipment, net 3,800,131 3,868,438 Other Assets Goodwill, net 498,524 510,562 Other intangibles, net 302,353 312,539 Other assets, net 644,013 590,622 --------------- -------------- Total other assets 1,444,890 1,413,723 --------------- -------------- $ 7,289,051 $ 6,823,527 =============== ============== LIABILITIES & STOCKHOLDER'S EQUITY (DEFICIT) Current Liabilities Current maturities of long-term debt $ 94,646 $ 77,496 Accounts payable 337,587 325,079 Payable to parent company 246,788 100,344 Traffic balances payable and unused tickets 883,506 638,019 Accrued expenses 1,381,818 1,435,194 --------------- -------------- Total current liabilities 2,944,345 2,576,132 Long-term Debt, Net of Current Maturities Long-term debt 2,624,801 2,674,376 Note payable - parent company - 67,556 --------------- -------------- Total long-term debt, net of current maturities 2,624,801 2,741,932
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USAir, Inc. Condensed Consolidated Balance Sheets September 30, 1996 (unaudited) and December 31, 1995 (Continued) - ------------------------------------------------------------------ (dollars in thousands, except per share amount) September 30, December 31, 1996 1995 --------------- -------------- LIABILITIES & STOCKHOLDER'S EQUITY (DEFICIT) (Continued) Deferred Credits and Other Liabilities Deferred gains, net 363,186 382,995 Postretirement benefits other than pensions, non-current 1,076,438 1,015,373 Non-current employee benefit liabilities and other 457,769 418,268 --------------- -------------- Total deferred credits and other liabilities 1,897,393 1,816,636 Stockholder's Equity (Deficit) Common stock, par value $1 per share, authorized 1,000 shares, issued and outstanding 1,000 shares 1 1 Paid-in capital 2,416,131 2,416,131 Retained earnings (deficit) (2,515,625) (2,649,310) Adjustment for minimum pension liability (77,995) (77,995) --------------- -------------- Total stockholder's equity (deficit) (177,488) (311,173) --------------- -------------- $ 7,289,051 $ 6,823,527 =============== ============== See accompanying Notes to Condensed Consolidated Financial Statements.
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USAir, Inc. Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 1996 and 1995 (unaudited) - --------------------------------------------------------- (in thousands) Nine Months Ended September 30, 1996 1995 ---------- ---------- Cash and cash equivalents beginning of period $ 879,613 $ 428,925 ---------- ---------- Cash flows from operating activities Net income (loss) 133,685 (579) Adjustments to reconcile net income (loss) to cash provided by (used for) operating activities Depreciation and amortization 226,508 252,157 Loss (gain) on disposition of property (373) (13,595) Amortization of deferred gains and credits (19,809) (19,809) Other 21,708 (2,014) Changes in certain assets and liabilities Decrease (increase) in receivables (91,112) (132,123) Decrease (increase) in materials, supplies, prepaid expenses and intangible pension assets (32,445) (71) Increase (decrease) in traffic balances payable and unused tickets 245,487 217,724 Increase (decrease) in accounts payable and accrued expenses 75,901 119,017 Increase (decrease) in postretirement benefits other than pensions, non-current 61,065 55,455 ---------- ---------- Net cash provided by (used for) operating activities 620,615 476,162 Cash flows from investing activities Aircraft acquisitions and purchase deposits, net (37,231) (49,675) Additions to other property (101,211) (49,556) Proceeds from disposition of property 14,748 151,909 Change in short-term investments (603,983) 21,994 Change in restricted cash and investments (2,347) 330 Payment of debt for affiliated company (42,830) - Other (10,490) (1,421) ---------- ---------- Net cash provided by (used for) investing activities (783,344) 73,581
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USAir, Inc. Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 1996 and 1995 (unaudited) (Continued) - ------------------------------------------------------------------------ (in thousands) Nine Months Ended September 30, 1996 1995 ---------------- ---------------- Cash flows from financing activities Issuance of debt 103,002 - Reduction of debt (165,993) (114,352) ---------------- ---------------- Net cash provided by (used for) financing activities (62,991) (114,352) ---------------- ---------------- Net increase (decrease) in cash and cash equivalents (225,720) 435,391 ---------------- ---------------- Cash and cash equivalents end of period $ 653,893 $ 864,316 ================ ================ Noncash investing and financing activities Issuance of debt - refinancing of debt secured by aircraft $ 159,998 $ - ================ ================ Reduction of debt - refinancing of debt secured by aircraft $ 154,422 $ - ================ ================ Reduction of parent company debt - aircraft acquisitions $ 68,641 $ - ================ ================ Issuance of debt - aircraft acquisitions $ 26,075 $ 162,125 ================ ================ Reduction of debt - aircraft purchase deposits $ - $ 70,837 ================ ================ Underwriter's fees - refinancing of debt secured by aircraft $ 2,488 $ - ================ ================ Supplemental Information Cash paid during the year for interest, net of amounts capitalized $ 216,360 $ 235,380 ================ ================ Net cash (received) paid during the year for income taxes $ 6,042 $ 4,751 ================ ================ See accompanying Notes to Condensed Consolidated Financial Statements.
15 USAir, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (1) Basis of Presentation The accompanying Condensed Consolidated Financial Statements include the accounts of USAir, Inc. ("USAir") and its wholly-owned subsidiary USAM Corp. ("USAM"). USAir is a wholly-owned subsidiary of USAir Group, Inc. ("USAir Group"). USAir has announced that it will terminate its Airline Technical Services, LLC joint venture with a subsidiary of British Airways Plc, effective January 1997. Airline Technical Services, LLC, a Delaware limited liability company, was formed during the fourth quarter of 1995 for the purpose of offering joint aviation maintenance, and technical and engineering expertise in the Americas. Amounts related to this joint venture included in the Company's financial results for the first nine months of 1996 are immaterial and no material charges are expected to result from its termination. Management believes that all adjustments necessary for a fair statement of results have been included in the Condensed Consolidated Financial Statements for the interim periods presented, which are unaudited. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain 1995 amounts have been reclassified to conform with 1996 classifications. These interim period Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements contained in USAir's Annual Report on Form 10-K for the year ended December 31, 1995. (2) Select Financial Information - USAM Investments Please refer to Note 7 in USAir Group's "Notes to Condensed Consolidated Financial Statements" on Page 9 of this report. (3) Non-Recurring Items Please refer to Note 8 in USAir Group's "Notes to Condensed Consolidated Financial Statements" on Page 9 of this report. 16 (4) Related Party Transactions During the third quarter of 1996, USAir prepaid certain long-term debt with a principal balance of approximately $42.8 million for Allegheny Airlines, Inc. ("Allegheny"), a wholly-owned regional airline subsidiary of USAir Group. As a result of this transaction, USAir and Allegheny entered into a long-term note receivable/payable agreement which expires in the year 2003. The balance of the long-term note receivable was approximately $42.5 million as of September 30, 1996. Effective October 1, 1996, USAir is purchasing the capacity generated by USAir Group's three wholly-owned regional air carriers at a fixed rate per ASM. These arrangements have no effect on USAir Group's financial statements; however, USAir's financial statements will reflect increased operating expenses from the capacity purchases and increased operating revenues from the sale of the purchased capacity. (5) Subsequent Event Please refer to Note 9 in USAir Group's "Notes to Condensed Consolidated Financial Statements" on Page 9 of this report. (this space intentionally left blank) 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion relates to the financial condition and results of operations of USAir Group, Inc. ("USAir Group" or the "Company"). USAir, Inc. ("USAir") is the Company's principal subsidiary and accounted for approximately 92% of the Company's operating revenues for the third quarter of 1996. Except where noted, the following discussion is based primarily upon USAir's financial condition, results of operations and future prospects. The Company recognized net income of $67.7 million for the third quarter of 1996 on operating revenues of $2.07 billion. USAir, whose results include its wholly-owned subsidiary USAM Corp. ("USAM"), recorded net income of $28.0 million for the same period. For the first nine months of 1996, the Company's net income was $236.2 million and USAir's net income was $133.7 million. The third quarter of 1996 was characterized by the continuation of the relatively stable domestic economic climate and favorable capacity and pricing trends in markets served by the Company's airline subsidiaries that have existed since mid-1995. However, the Company's airline subsidiaries recently began experiencing increased competitive pressure. ValuJet Inc. ("ValuJet") reinstated service on September 30th, Delta Air Lines, Inc. ("Delta") launched its low cost, low fare product "Delta Express" on October 1st and Southwest Airlines, Inc. ("Southwest") further expanded its East Coast presence on October 27th. ValuJet had reduced its service in May 1996 and suspended operations entirely on June 17, 1996. The Company estimates that approximately 8% of USAir's capacity (as measured by available seat miles or "ASMs") directly overlapped with ValuJet's route structure prior to ValuJet's service reduction. ValuJet, which operated 51 aircraft prior to its service reduction, currently operates 15 aircraft. The Company believes that ValuJet's cessation of operations had a favorable effect on the Company's Passenger Transportation revenues during the second and third quarters of 1996, but has not precisely quantified such effect. The Company is unable to predict whether ValuJet's capacity in markets also served by USAir will eventually match or exceed the pre-May 1996 levels. The Company considers the presence of Delta Express and Southwest a serious competitive threat in markets served by its airline subsidiaries. Delta Express marks the culmination of Delta's efforts to establish a product capable of competing with low cost, low fare air carriers such as ValuJet and Southwest. Delta Express, which became possible as a result of a new labor agreement Delta recently entered into with its unionized pilots group, currently operates between Florida and 10 Northeast and Midwest cities. Southwest, which first entered the intra-East Coast market during 1993, recently initiated service between Providence and Baltimore, Orlando, Tampa, Nashville and Chicago. Southwest's service at Providence, which is approximately 60 miles from Boston, has resulted in some passenger traffic being drawn from Boston's Logan International Airport. USAir and its regional airline affiliates have substantial operations at Boston's Logan International Airport. Southwest has reported that its unit operating cost is approximately 7.50 cents per ASM and USAir estimates that Delta Express' unit operating cost will be near this level. USAir's unit operating cost was 12.44 cents per ASM for the third quarter of 1996. 18 The Company estimates that USAir's direct route overlap with Delta Express and Southwest is currently 2.4% and 2.3%, respectively (as measured by ASMs). However, the Company anticipates that USAir's route overlap with both competitors, as well as the intensity of the competitive pressure on USAir, will increase as Delta Express follows its planned doubling of operations by January 1997 and Southwest allocates additional resources to its new Northeast operations. Direct competition with low cost, low fare air carriers or operations has typically resulted in the dilution of yield realized by the Company's airline subsidiaries, depending on the number of markets affected. USAir's cost structure continues to be the highest of all major air carriers in the U.S. Despite the Company's favorable financial results for the first nine months of 1996, the competitive threat posed by low cost, low fare competition presents a serious challenge to the Company to lower USAir's cost structure to remain competitive and ensure long-term financial viability. Negotiations With Organized Labor Groups USAir's contract with the International Association of Machinists and Aerospace Workers ("IAM") became amendable in October of 1995 and its contract with the Air Line Pilots Association ("ALPA") became amendable on April 30, 1996. USAir's contract with its flight attendant employee group, represented by the Association of Flight Attendants ("AFA"), will be amendable on January 1, 1997. Collective bargaining talks between USAir and the IAM and ALPA continued during the third quarter. USAir has also had preliminary talks with the AFA. USAir cannot predict the outcome of these negotiations at this time or if it will be able to secure meaningful wage and benefit concessions and productivity improvements from its unionized employee groups. The Company remains committed to reducing USAir's personnel costs and improving employee productivity. Proposed British Airways-American Airlines Alliance On June 11, 1996, American Airlines, Inc. ("American") and British Airways Plc ("British Airways") announced a proposed alliance to jointly market, price and manage their North Atlantic airline services, effective April 1, 1997, subject to U.S. and international approvals. The joint services would carry the designator codes of both airlines and each would code-share beyond the other's gateways. The two airlines have also indicated that they intend to act cooperatively in other areas, such as marketing, sales, facilities use and cargo. British Airways and American have stated that they will seek antitrust immunity in connection with approval of their alliance. Certain competition authorities in the U.S. and Europe have made inquiries into the proposed alliance and several airlines serving the North Atlantic have raised very strong objections to the proposed alliance. On July 30, 1996, the Company and USAir initiated a lawsuit in U.S. District Court for the Southern District of New York against British Airways, BritAir Acquisition Corp., Inc., American and American's parent company, AMR Corp. The Company and USAir have claimed that British Airways, in pursuit of an alliance with American, has breached its fiduciary duty to the Company and USAir and has violated certain provisions of the January 21, 1993 Investment Agreement between the Company and British Airways. In addition, the lawsuit claims that American has aided 19 and abetted British Airways' breach of its fiduciary duties and has tortiously interfered with British Airways' performance of its obligations under the Investment Agreement. The lawsuit also claims that the defendants are in violation of U.S. antitrust laws that prohibit conduct that harms competition. On September 20, 1996, and September 27, 1996, respectively, British Airways and American filed Motions to Dismiss the lawsuit brought by USAir. In a hearing on October 25, 1996, U.S. District Court Judge Cederbaum heard oral arguments on the Motions to Dismiss. The Court dismissed a portion of the lawsuit against American relating to non-antitrust claims. The other claims against American and British Airways remain pending and the Court took under submission the Motions to Dismiss these claims. The Company is unable to predict at this time the ultimate outcome of this lawsuit. Payment of Dividends on Senior Preferred Stock On October 25, 1996, the Company paid dividends of $40.0 million on its outstanding Senior Preferred Stock. The Company also paid dividends of $43.0 million on its outstanding Senior Preferred Stock during August 1996. Prior to the August 1996 dividend payment, the Company had deferred the payment of dividends on all of its outstanding preferred stock issuances effective with dividend payments due September 30, 1994. The Company's capital surplus as of September 30, 1996, as calculated in accordance with Delaware General Corporation Law based on the Company's Condensed Consolidated Balance Sheets (which are contained in Part I, Item 1A of this report), was $33.1 million. This surplus amount is after the effect of the October dividend payment, which was accrued for payment as of September 30, 1996. The Company's outstanding Series B Preferred Stock is junior to the Company's Senior Preferred Stock and is not eligible to receive dividends until the deferred dividends on the Senior Preferred Stock are paid in full and all Senior Preferred Stock dividend payments are current. There can be no assurance of when or if the Company's Board of Directors will declare additional dividends on the Company's outstanding capital stock. After the October dividend payment, accumulated deferred dividends on all of the Company's outstanding preferred stock issuances, including penalty dividends thereon, totaled approximately $97.9 million. See Note 3 to the Company's Condensed Consolidated Financial Statements contained in Part I, Item 1A of this report for a description of each of the Company's outstanding preferred stock issuances and Part II, Item 3 of this report, "Defaults Upon Senior Securities," for additional information with respect to accumulated deferred dividends. Government Regulation The Federal Aviation Administration ("FAA") has proposed new regulations that would require flight data recorders that measure more flight parameters than most original equipment flight data recorders. The proposed regulations, subject to DOT approval, would require the upgraded flight data recorders to be installed within four years. The proposal, as drafted, would affect USAir's 20 entire operating fleet. The Company estimates that the proposed regulations, if adopted, would cost USAir approximately $20 million over the four year period. The Company cannot predict whether or when the proposed regulations will be adopted or if the proposed regulations will result in expenditures consistent with the Company's current estimate. Following the July 1996 accident involving a Trans World Airlines, Inc. aircraft and the speculation that the cause of the accident may have been sabotage, President Clinton ordered new security measures related to passenger, baggage and cargo screening, particularly with respect to international operations. The increased security measures have resulted in an increase in the Company's operating expenses, although the dollar effect of the new security measures is not material. The President also formed a special committee which is reviewing aviation safety and airport security, as well as the air traffic control system. The committee's final recommendations are not expected before February 1997. Further increases in government-mandated security measures may have an adverse effect on the Company's results of operations and financial condition depending on the ability of USAir and its regional affiliates to pass-through any new Federal taxes, surcharges or additional operating expenses to customers. Any effective increase in the cost of air transportation may dampen passenger and cargo traffic levels which could have a material adverse effect on the Company's results of operations and financial condition. The 10% Federal excise tax on domestic air transportation ("ticket tax") was reinstated on August 27, 1996, for tickets sold for travel before January 1, 1997. This tax, 10% of the cost of an airline ticket, had previously expired on January 1, 1996. The Company believes that its Passenger Transportation revenues were stimulated during the period the tax was not in effect - the absence of the tax effectively reduced the cost of air travel. The Company cannot estimate the dollar impact of the tax expiration on its Passenger Transportation revenues during the period the tax was not collected due to the complexity and number of factors that contribute to the Company's performance in this area. Legislation to extend the tax past the January 1, 1997 expiration date has not been enacted by Congress. The Company is unable to predict whether this tax will be extended past the January 1, 1997 expiration date or reimposed at a later date. As mentioned above, any effective increase in the cost of air transportation may have an adverse effect on air transportation demand which could have a material adverse effect on the Company's results of operations and financial condition. The Company's airline subsidiaries became obligated to pay the $.043 per gallon Federal Excise Tax on Transportation Fuels on October 1, 1995. Airlines had a three year exemption from this tax, which became law during 1992. Attempts to either rescind this tax or reinstate the airline exemption continue, although these efforts have not been successful to date. USAir cannot predict the ultimate outcome of future attempts to either rescind the tax or reinstate the airline exemption. USAir estimates that this tax will result in additional operating expenses of approximately $42 million for 1996 based on its current projected 1996 domestic aviation fuel consumption. USAir recognized expense of approximately $11 million and $31 million as a result of this tax during the third quarter and first nine months of 1996, respectively. 21 Other Information On November 12, 1996, USAir Group, Inc. announced that it will change its name to US Airways Group, Inc. and the name of its wholly-owned subsidiary, USAir, Inc., will change to US Airways, Inc. The name changes are scheduled to become effective in early 1997. Following the name changes, USAir's operations will be conducted under the name US Airways. On November 6, 1996, USAir announced that it has entered into an agreement-in-principle with AVSA, S.A.R.L., an affiliate of aircraft manufacturer Airbus Industrie ("Airbus"), regarding the acquisition by USAir of up to 400 Airbus A319, A320 and A321 narrowbody aircraft (collectively, the "Airbus Aircraft") for delivery to USAir between 1997 and 2009. The proposed transaction would be comprised of 120 firm Airbus Aircraft and 120 Airbus Aircraft to be reconfirmed by USAir at a future date. In addition, USAir would have the option to acquire up to 160 additional Airbus Aircraft with open-ended delivery dates. USAir would have the flexibility in selecting among the 122-seat A319, the 144-seat A320 and the 168-seat A321, depending upon projected industry conditions at the time final delivery schedules were set. The agreement-in-principle with Airbus remains subject to required approvals of Airbus and the Company, a definitive purchase agreement and related documentation with Airbus, USAir reaching a satisfactory arrangement with one or more engine manufacturers, and USAir achieving a competitive cost structure. The Airbus Aircraft are presently intended as, at a minimum, replacement aircraft for USAir's existing fleet of McDonnell Douglas DC-9-30 and MD-80 aircraft, Boeing 737-200 aircraft, and Fokker F-28-4000 aircraft, all of which are intended to be disposed of by USAir. The Company has not yet determined whether consummation of the Airbus transaction and the disposition of the aircraft intended to be replaced would require the Company to recognize an "impairment loss" in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." USAir also announced that it would begin examining alternatives for widebody aircraft to support USAir's goal of increased international operations. USAir has advised The Boeing Company ("Boeing") and Rolls Royce Plc that it does not plan to accept delivery of the eight Boeing 757-200 aircraft USAir presently has on firm order. USAir is in continuing discussions with Boeing and other relevant parties regarding modifications to the applicable purchase agreements. Consistent with those discussions and a recent written statement from Boeing extending the scheduled delivery dates of the Boeing 757s from 1998 to 1999, USAir did not make a progress payment to Boeing of approximately $3 million which was, prior to such extension, scheduled to be due on November 1, 1996. On November 7, 1996, Boeing alleged that USAir was in default of the 757 purchase agreement for failing to make a progress payment on November 1, 1996. Boeing demanded that the alleged default be cured and certain other conditions be satisfied by November 14, 1996 or Boeing would purportedly terminate the 757 purchase agreement and might seek to exercise other remedies against USAir. USAir, Boeing and other relevant parties are in continuing discussions regarding the status of the 737 and 757 purchase 22 agreements, and USAir cannot predict whether Boeing will seek to exercise remedies against USAir and if so, whether the effect on USAir's financial condition or results of operations would be material. In October 1996, certain Series B Preferred Stock shareholders informed the Company of their intent to pursue the right to elect two additional directors to the Company's Board of Directors. Under the terms of the Series B Preferred Stock, the holders of that security have the right to elect two directors to the Board of Directors of the Company if six quarterly dividend payments are not paid. That right became effective on February 15, 1996 (see information related to the Company's recent payment of dividends on Senior Preferred Stock under "Payment of Dividends on Senior Preferred Stock" above). On October 24, 1996, USAir notified British Airways that it was terminating the code sharing and frequent traveler agreements between the two companies effective March 29, 1997 as a result of British Airways' decision to enter into an alliance with American (see also "Proposed British Airways-American Airlines Alliance" above ). In addition, certain other commercial arrangements between USAir and British Airways are in the process of being terminated. The Company does not anticipate any material adverse impact on its results of operations or financial condition as a result of the termination of these arrangements. On October 23, 1996, the Company and USAir filed a Current Report on Form 8-K with the Securities and Exchange Commission ("SEC") related to the news release of financial results for both companies for the three months and nine months ended September 30, 1996. The Company disclosed in this Current Report that USAir's capacity (ASMs) is expected to increase by approximately 8% for the fourth quarter of 1996 versus the comparable periods in 1995 and that USAir's unit operating cost for the fourth quarter of 1996 is expected to be approximately 2%-3% higher, excluding aviation fuel expenses, compared to the fourth quarter of 1995. USAir's bookings for the fourth quarter of 1996 have been at levels consistent with those experienced during the third quarter of 1996, considering seasonality. The Company also expects USAir's yield and load factor for the fourth quarter of 1996 to remain relatively flat to slightly up versus the fourth quarter of 1995. See "Results of Operations" below for information related to estimated future increases in certain components of the Company's operating expenses. The Company has embarked on a program to upgrade and standardize the interiors of USAir's operating aircraft over the next three years as part of its efforts to make USAir "the airline of choice." The first phase of the program, which is in progress and expected to be completed during the fourth quarter of 1996, involves minor changes and improvements to the interiors of each of USAir's operating aircraft. This phase of the program will result in minimal incremental expenditures, but will provide a substantial short-term improvement in the appearance of each aircraft. The second phase of the program, which is scheduled to begin in February 1997 and expected to be completed in 1998, includes, depending on the type of aircraft, the replacement of carpets, seat cushions, sidewalls and overhead storage bins, repainting other aircraft interior components, reconfiguring and/or upgrading seats, expanding first class seating and adding or replacing lavatories. The Company currently estimates that the second phase of this program will 23 result in one-time incremental expenditures of approximately $85 million, approximately $30 million of which is expected to be capitalized. Effective November 1, 1996, the Company's 1992 Stock Option Plan ("1992 Plan") was amended to include a stock appreciation right ("SAR") feature and SARs were granted to option holders under this plan on a one-for-one basis. For each SAR, the holder is entitled to receive the excess of the fair market value of a share of the Company's Common Stock and $15. The exercise of any SAR cancels its tandem option. Conversely, the exercise of any option cancels its tandem SAR. The SARs have the same expiration date as the tandem options. To the extent the fair market value of a share of its Common Stock exceeds $15, the Company will record compensation expense based on SARs outstanding. As of November 1, 1996, approximately 4.9 million options and SARs were outstanding under the 1992 Plan. In April 1996, USAir introduced electronic ticketing, or "ticketless travel," as an option for customers traveling within the U.S. on USAir or USAir Express. Electronic ticketing enables a customer to book a flight through USAir's reservations system and receive a confirmation number instead of a paper ticket. The Company believes that electronic ticketing enhances customer convenience and will help reduce USAir's distribution costs. Distribution costs currently account for approximately $1 billion of the Company's annual operating expenses. Customer response to electronic ticketing has been favorable and customer use of electronic ticketing has steadily increased since its introduction. USAir recently announced that travel agencies using the SABRE and Apollo computer reservation systems can now offer their customers USAir's electronic ticketing option. USAir continues to work towards expanding electronic ticketing to other computer reservation systems, international service and USAir Shuttle flights. Seeking to increase its international operations, on August 21, 1996, USAir filed with the U.S. Department of Transportation to serve London's Heathrow Airport from Boston, Charlotte, Philadelphia and Pittsburgh. USAir currently serves Frankfurt, Munich, Madrid, Paris and Rome. Pursuant to the Investment Agreement between the Company and British Airways, British Airways has the right to maintain its proportionate ownership of the Company's securities under certain circumstances by purchasing additional shares of a series of Series T Cumulative Convertible Exchangeable Senior Preferred Stock ("Series T Preferred Stock"). During April 1996 British Airways advised the Company that it would not exercise their right (triggered by issuances of Common Stock pursuant to certain USAir stock incentive and employee benefit plans during the nine month period ended March 31, 1996) to buy additional shares of Series T Preferred Stock. Results of Operations The following section provides an overview of changes in certain components of the Company's results of operations (the Company's Condensed Consolidated Statements of Operations are contained in Part I, Item 1A of this report). See Exhibit 99 to this report for select USAir operating and financial statistics. Exhibit 99 also includes the definition of each of the terms used below. All terms used in this section refer to USAir's scheduled service operations except for unit operating cost, which includes charter service. 24 Three Month Period Ended September 30, 1996 Compared With the Three Month Period Ended September 30, 1995 USAir Group recorded net income of $67.7 million for the third quarter of 1996, an improvement of $24.7 million (or 57.3%) versus its results for the third quarter of 1995. After provision for preferred stock dividends (see discussion above under "Payment of Dividends on Senior Preferred Stock"), the Company earned $45.4 million during the third quarter of 1996, or $0.69 per common share. USAir's passengers, RPMs, capacity (ASMs), load factor and yield all increased quarter-over-quarter. With the exception of the capacity increase, these statistics increased as a result of the relatively stable domestic economic climate and favorable capacity and pricing trends in markets served by the Company's airline subsidiaries which prevailed during the third quarter of 1996 (see discussion above). In addition, as discussed under "Government Regulation" above, the Company believes that the absence of the ticket tax for most of the third quarter of 1996 may have had a stimulative effect on traffic during that period. The quarter-over-quarter capacity increase was marginal. USAir continues to be the highest-cost major air carrier in the U.S. USAir's unit operating cost was 12.44 cents for the third quarter of 1996, a 9.1% increase versus its unit operating costs for the third quarter of 1995. This increase is primarily the result of higher operating expenses applied over relatively unchanged capacity levels period-over-period (see discussion below related to changes in certain components of the Company's operating expenses). Operating Revenues Passenger Transportation - USAir's Passenger Transportation revenues increased $177.5 million, or 11.4%, with the remainder of the $198.0 million increase attributable to the Company's regional airline subsidiaries. USAir's increase is the result of a 4.7% increase in yield and a 6.3% increase in RPMs. In addition, the average passenger journey increased 4.1% due primarily to additional long-haul flying quarter-over-quarter. The main factors that contributed to the Company's improved performance during the third quarter of 1996, including the general economic climate, market conditions, the absence of the ticket tax for most of the quarter and the temporary decrease in low cost, low fare competition, are discussed above. The Company believes that Hurricanes Fran and Edouard, which occurred during September 1996, adversely affected the Company's Passenger Transportation revenues by approximately $10 million. As discussed above, the Company's airline subsidiaries are experiencing increased competitive pressure with ValuJet's recent reinstatement of service, the October 1996 launch of Delta Express and Southwest's late-October 1996 expansion into the Northeast U.S. Direct competition with low cost, low fare air carriers or operations has typically resulted in the dilution of yield realized by the Company's airline subsidiaries, depending on the number of markets affected. 25 Other Operating Revenues - Fees received by USAir for passenger handling and reservation services from USAir Express air carriers (other than the fees USAir receives from the Company's three wholly-owned regional air carriers, which are eliminated during the consolidation of the Company's results of operations) increased due to higher passenger volumes and a higher fee structure. In addition, USAir experienced increased revenues from frequent traveler program participation fees, reservation cancellation fees and aircraft lease arrangements. The wet lease arrangement with British Airways expired during the second quarter of 1996. For the third quarter of 1995, wet lease revenues of approximately $16.2 million were included in the Company's Other Operating Revenues. Increases or decreases in components of Other Operating Revenues are largely offset by related changes in Other Operating Expenses or other operating expense categories. Operating Expenses Personnel Costs - Interest rate-driven increases in pension and post-retirement benefits expenses, profit sharing expenses, contractual wage increases that USAir's pilot and flight attendant employee groups received in January 1996 and wage increases received by certain non-contract employees effective January 1, 1996, combined to more than offset personnel complement decreases. USAir's flight attendants and pilots also received contractual wage increases in January 1995 and July 1995, respectively, and USAir's mechanics received contractual wage increases in March 1995. USAir had 40,047 full-time equivalent employees on September 30, 1996 versus 40,455 full-time equivalent employees on September 30, 1995. Pension, long-term disability and post-retirement benefits expenses increased approximately $24.9 million quarter-over-quarter. The Company recorded profit sharing expense of $41.1 million during the third quarter of 1996 versus $15.2 million during the third quarter of 1995. Based on its current projection of results for the fourth quarter of 1996, the Company expects to record additional profit sharing expenses of approximately $41 million during the fourth quarter of 1996. Aviation Fuel - USAir's aviation fuel consumption was relatively unchanged quarter-over-quarter, but rate factors contributed to a 21.4% increase in aviation fuel expense. USAir paid an average of 63.21 cents per gallon for aviation fuel during the third quarter of 1996. Aviation fuel prices have continued to increase during the fourth quarter of 1996. USAir is currently paying approximately 70 cents to 72 cents on average for a gallon of aviation fuel. Aviation fuel prices are subject to market conditions and other factors that are generally outside of the Company's control. Fluctuations in the price of aviation fuel can have a dramatic effect on the Company's results of operations. Based on current consumption, each one cent per gallon increase in USAir's cost of aviation fuel translates into an increase of approximately $11 million in USAir's annual aviation fuel expense. See Other Operating Expenses below related to Federal taxes on aviation fuel. Commissions- Increased due to increases in Passenger Transportation revenues. Aircraft Rent - Increased due primarily to two leased Boeing 767-200ER aircraft reentering USAir's operating fleet during the first half of 1996. USAir recognized expenses related to these aircraft in the Other Operating Expenses category while they were operated by British Airways. 26 Aircraft Maintenance - Decreased approximately $7.8 million. Efficiencies gained from reengineering efforts in USAir maintenance areas, the effects of fewer operating aircraft in USAir's fleet and timing factors contributed to the expense reduction. USAir recently signed a 10 year contract with a subsidiary of the General Electric Company ("GE") for the upkeep and overhaul of USAir's CF6 and CFM-56 jet engines. These engines, originally manufactured by GE, power all of USAir's 767-200ER, 737-300 and 737-400 aircraft. The Company expects a long-term decrease in maintenance costs associated with these engines because of the new contract, but may experience higher maintenance costs during the fourth quarter of 1996 due to the transition from the former servicer to GE. Depreciation and Amortization - Decreased due mainly to fewer owned aircraft in USAir's operating fleet. Other Operating Expenses - Increased due primarily to additional Federal taxes on aviation fuel and increased communications-related costs. The Federal Excise Tax on Transportation Fuels totaled approximately $11 million for the third quarter of 1996 (see also "Government Regulation" above). The wet lease arrangement with British Airways expired during the second quarter of 1996, however, wet lease expenses of approximately $16.2 million were included in the Company's Other Operating Expenses for the third quarter of 1995 (see also Other Operating Revenues and Aircraft Rent above). Other Income (Expense) Interest Income - Increased due mainly to higher Cash and Cash Equivalents and Short-Term Investments balances period-over-period. Interest Expense - Decreased primarily as the result of less long-term debt outstanding period-over-period. The Company made early debt repayments of approximately $44.8 million during the third quarter of 1996. Equity in Earnings (Loss) of Affiliates - Amounts pertain to USAM's equity interest in the earnings of Galileo International Partnership, Apollo Travel Services Partnership ("ATS") and Galileo Japan Partnership. Results for all three partnerships improved primarily driven by increases in airline industry passenger volumes period-over-period. Other, Net - Results for the third quarter of 1996 include expense of $9.8 million related to USAir's settlement of litigation involving travel agencies (see Part II, Item 1. "Legal Proceedings" for additional information) and reserves of $10.5 million related to USAir's planned disposition of five non-operating aircraft. Results for the third quarter of 1995 included a gain of $5.5 million related to the sale of certain Boeing 737-300 aircraft. 27 Nine Month Period Ended September 30, 1996 Compared With the Nine Month Period Ended September 30, 1995 On a year-to-date basis, USAir Group recorded net income of $236.2 million, an improvement of $177.2 million or triple its net income for the first nine months of 1995. After provision for preferred stock dividends (see discussion above under "Payment of Dividends on Senior Preferred Stock"), the Company earned $169.1 million during the first nine months of 1996, or $2.58 per common share. USAir's passengers and capacity (ASMs) decreased period-over-period, however, RPMs, load factor and yield all increased for the same comparative period. Passenger and capacity decreases mainly reflect mid-1995 schedule reductions with the harsh winter weather during the first quarter of 1996 contributing to the decrease. The increase in RPMs, load factor and yield are primarily due to the continuation of a relatively stable domestic economic climate and favorable capacity and pricing trends in markets served by the Company's airline subsidiaries. In general, the favorable capacity and pricing trends have been evident since the demise of the Continental Lite product (offered by Continental Airlines, Inc.) early in the second quarter of 1995. Competition with Continental Lite included USAir lowering fares in certain markets to maintain market share. In addition, as discussed under "Government Regulation" above, the Company believes that the absence of the ticket tax during the first eight months of 1996 may have had a stimulative effect on traffic during that period. USAir's unit operating cost was 12.66 cents for the first nine months of 1996, a 12.4% increase versus the first nine months of 1995. This increase is primarily the result of higher operating expenses applied over slightly less capacity (ASMs) period-over-period (see discussion below related to changes in certain components of the Company's operating expenses). USAir recorded two non-recurring items during the first nine months of 1996 related to its non-operating British Aerospace BAe-146-200 ("BAe-146") aircraft. USAir reached agreements to sublease eleven BAe-146s during the second quarter of 1996 (in addition to the three sublease agreements reached during the fourth quarter of 1995). Both non-recurring items resulted in credits to Operating Expense categories. USAir reversed $22.5 million of previously accrued rent obligations related to these aircraft against Aircraft Rent expense and reversed $7.0 million against Aircraft Maintenance expense related to previously accrued lease return provisions. USAir has recently reached an agreement to dispose of its only owned BAe-146. Operating Revenues Passenger Transportation - USAir's Passenger Transportation revenues increased $368.7 million, or 7.8%, with the remainder of the $442.1 million increase attributable to the Company's regional airline subsidiaries. USAir's increase is primarily the result of a 6.7% increase in yield, a 1.0% increase in RPMs and a 2.8% increase in average passenger journey. The main factors that contributed to the Company's improved year-over-year performance, including the general economic climate, market conditions, the impact of the absence of the ticket tax during the first 28 eight months of 1996 and the temporary decrease in low cost, low fare competition experienced by the Company's airline subsidiaries during the second and third quarters of 1996, are discussed above. The Company estimates that severe winter weather within the Eastern U.S. and the partial Federal Government shutdown adversely affected first quarter 1996 revenues by approximately $55 million. In addition, the Company estimates that Hurricanes Fran and Eduoard, which occurred during September 1996, adversely affected the Company's Passenger Transportation revenues by approximately $10 million. The Company's airline subsidiaries faced intense competitive pressure from Continental Lite during early 1995. As mentioned above, competition with Continental Lite included USAir lowering fares in certain markets to maintain market share. See also the quarter-over-quarter analysis of Passenger Transportation revenues above for information related to the recent increase in competitive pressure on the Company's airline subsidiaries. Other Operating Revenues - Fees received by USAir for passenger handling and reservation services from USAir Express carriers (other than the fees USAir receives from the Company's three wholly-owned regional air carriers, which are eliminated during the consolidation of the Company's results of operations) increased due to higher passenger volumes and a higher per-passenger fee structure. In addition, USAir had increased revenues from frequent traveler program participation fees, reservation cancellation fees and aircraft lease arrangements. Revenues received from the wet lease arrangement with British Airways decreased approximately $35.0 million due to the expiration of the arrangement during May 1996. Increases or decreases in components of Other Operating Revenues are largely offset by related changes in Other Operating Expenses or other operating expense categories. Operating Expenses Personnel Costs - Increased due mainly to the same factors discussed above in the quarter-over-quarter analysis of Personnel Costs. Pension, long-term disability and post-retirement benefit expenses increased by approximately $63.4 million period-over-period. In addition, expenses related to stock option grants, stock grants, severance payments and similar-type compensation increased approximately $22.1 million year-over-year. The Company recorded profit sharing expense of $82.4 million during the first nine months of 1996 versus $15.2 million during the first nine months of 1995. See related discussion above in quarter-over-quarter analysis of Personnel Costs. Aviation Fuel - USAir experienced an increase in the average cost of aviation fuel per gallon of approximately 8.75 cents period-over-period. The Company's Aviation Fuel expense increased $54.7 million. See discussion of quarter-over-quarter changes in Aviation Fuel expense above. See also Other Operating Expenses below related to Federal taxes on aviation fuel. 29 Commissions - Increases linked to higher Passenger Transportation revenues were partially offset by the effects of the revised rate structure for commissions paid to travel agencies, which went into effect during February 1995. Aircraft Rent - Excluding the effects of the non-recurring item discussed above, Aircraft Rent expense increased approximately 4.4%. The increase is due primarily to two leased Boeing 767-200ER aircraft reentering USAir's operating fleet during the first half of 1996. USAir recognized expenses related to these aircraft in the Other Operating Expenses category while they were operated by British Airways. Aircraft Maintenance - Excluding the effects of the non-recurring item discussed above, Aircraft Maintenance expense increased approximately $8.0 million. Efficiencies gained from reengineering efforts in USAir maintenance areas, the effects of fewer operating aircraft in USAir's fleet and timing factors were more than offset by an increase in the average cost USAir incurred to overhaul certain jet engines. See quarter-over-quarter analysis above related to USAir's new contract with GE for repair and overhaul work of certain jet engines. Depreciation and Amortization - Decreased mainly due to fewer owned aircraft in USAir's operating fleet. Other Operating Expenses - Increased primarily due to additional Federal taxes on aviation fuel and increases in insurance and communications-related costs. USAir also experienced higher credit card expenses linked to higher Passenger Transportation revenues. The Federal Excise Tax on Transportation Fuels totaled approximately $31 million for the first nine months of 1996 (see also "Government Regulation" above). Expenses related to the wet lease arrangement with British Airways decreased approximately $35.0 million due to the expiration of this arrangement during May 1996 (see also Other Operating Revenues above). Other Income (Expense) Interest Income - Increased due mainly to higher Cash and Cash Equivalents and Short-Term Investments balances period-over-period. Interest Expense - Decreased primarily as the result of less long-term debt outstanding period-over-period. USAir made early debt repayments totaling approximately $202.1 million during 1995. See also the quarter-over-quarter analysis of Interest Expense above. Equity in Earnings (Loss) of Affiliates - Results for USAM's equity investments improved due primarily to increases in airline industry passenger volumes year-over-year. Other, Net - Net expenses increased due primarily to the same factors discussed above in the quarter-over-quarter analysis of Other, Net above. 30 Liquidity and Capital Resources Net cash provided by operations was $667.6 million for the first nine months of 1996. As of September 30, 1996, Cash and Cash Equivalents totaled $655.4 million and Short-Term Investments totaled $631.1 million. USAir also had $102.3 million deposited in trust accounts to collateralize letters of credit and worker's compensation policies at quarter-end. These deposits are included in the Other Asset category on the Company's Condensed Consolidated Balance Sheets (which is contained in Part I, Item 1A of this report). USAM received a special cash distribution of approximately $33.7 million from ATS during the second quarter of 1996, reflected in the Other operating adjustments category on the Company's Condensed Consolidated Statements of Cash Flows (which is contained in Part I, Item 1A of this report). The special distribution was part of an ATS distribution of cash to its partners. USAM has received distributions totaling approximately $44.8 million from its computer reservation system investments, including the special ATS distribution, during the first nine months of 1996. The Company made contributions of approximately $76 million to certain defined benefit pension plans during the third quarter of 1996 in order to meet statutory minimum pension funding requirements. Also during the third quarter of 1996, the Company revised its estimate of short-term pension plan funding requirements resulting in a decrease in the Company's current liabilities. The combined effect of the third quarter 1996 pension plan funding payments and the revision of short-term pension plan funding estimates was a decrease in the Company's current liabilities of approximately $137 million and a corresponding increase in the Company's long-term liabilities. The effects of the revision, which have significantly reduced the Company's estimate of anticipated cash outflows for the next twelve months, are reflected in the Company's Condensed Consolidated Balance Sheets as of September 30, 1996. If the Company's results for the fourth quarter of 1996 meet current expectations, the Company will pay its remaining obligation under the 1992 Salary Reduction Plan, approximately $130 million, during the first quarter of 1997. This payment would end the Company's obligations for profit sharing under this plan (the anticipated first quarter 1997 payment will be based on expenses the Company recognizes for 1996 and in earlier periods). Effective November 1, 1996, the Company is obligated to pay the excess of the fair market value of a share of the Company's Common Stock and $15 upon the exercise of SARs issued under the Company's 1992 Stock Option Plan (see discussion above under "Other Information"). SAR exercises could have a material adverse effect on the Company's anticipated future cash outflows depending on the number and timing of SAR exercises and the fair market value of a share of the Company's Common Stock when SARs are exercised. The Company has also initiated a program to upgrade and standardize the interiors of USAir's operating aircraft. This program, described under "Other Information" above, will result in currently estimated incremental expenditures of approximately $85 million, primarily during 1997 and 1998. 31 As discussed in "Other Information" above, USAir has entered into an agreement-in-principle with an affiliate of Airbus for the acquisition of up to 400 Airbus Aircraft. Although the agreement-in-principle is subject to several contingencies, the acquisition of aircraft by USAir could have a material effect on the Company's anticipated long-term capital expenditures. The Company expects to satisfy all of its short-term liquidity requirements, including the cost of USAir's aircraft interior upgrade and standardization program, through a combination of cash on hand and cash flows from operations. Although the Company's current assets have increased by approximately $502.4 million since the end of 1995, the Company remains highly leveraged. The Company and USAir require substantial working capital in order to meet scheduled debt and lease payments and to finance day-to-day operations. In addition, the Company currently does not have access to short-term credit or receivable sale facilities. Changes in certain factors that are generally outside the Company's control, such as an economic downturn, additional government regulation, intensified competition from low cost, low fare air carriers or operations (see related discussion above) and further increases in the price of aviation fuel, could have a materially adverse effect on the Company's liquidity, financial condition and results of operations. USAir's high cost structure relative to its major competitors results in the Company being particularly susceptible to adverse changes in general economic and market conditions. Investing activities during the first nine months of 1996 included cash outflows of $142.9 million for the acquisition of assets ($21.2 million related to progress payments for Boeing 757-200 aircraft (see "Other Information" above for recent developments concerning Boeing), $15.2 million related to USAir's purchase of four Boeing 737-200 aircraft prior to lease expiry during the third quarter of 1996 and $105.7 million related to the purchase of hush kits, rotables, computer equipment and various ground support equipment). The Company's Short-Term Investments increased $604.0 million during the period primarily due to the Company's operations generating significantly more cash than needed to fulfill immediate operational needs. The Other investing uses of cash category includes $12.2 million related to the purchase of debt issued by Shuttle, Inc. during the first quarter of 1996. The net cash used by investing activities during the first nine months of 1996 was $744.6 million. Net cash used by financing activities during the first nine months of 1996 was $149.4 million. During the third quarter of 1996, USAir paid off certain long-term debt with a principal amount of approximately $42.8 million for one of the Company's regional airline subsidiaries (USAir and the regional air carrier entered into a long-term note receivable agreement which is reflected in USAir's Other Assets on its Condensed Consolidated Balance Sheets; amounts related to the intercompany note agreement are eliminated for purposes of consolidation and are therefore not reflected in the Company's Condensed Consolidated Balance Sheets). USAir sold $263.0 million principal amount of Enhanced Equipment Notes ("Enhanced Notes") during the first quarter of 1996 through a private placement offering under SEC Regulation 144A. USAir used the proceeds from the offering as part of the funds necessary to repay in full the indebtedness incurred in connection with certain Boeing 757-200 aircraft delivered to USAir in 1994 and 1995. The transaction is reflected on the Company's Condensed Consolidated Statements of Cash Flows as proceeds from the issuance of debt of $103.0 million and a "non-cash" issuance 32 of debt of $160.0 million. The non-cash component reflects proceeds that USAir directed to reduce debt and pay underwriter's fees at the time of the offering. USAir used the cash proceeds it received from the offering and additional funds to make debt repayments of approximately $105.5 million immediately following the offering. The Enhanced Notes are secured by nine Boeing 757-200 aircraft. USAir filed a Form S-4 Registration Statement with the SEC during July 1996 in connection with its offer to exchange registered Enhanced Notes for the privately-placed Enhanced Notes. The exchange offer was completed in August 1996. The exchange offer did not result in cash inflows or outflows with the exception of filing fees and certain administrative costs. In addition to the prepayment and refinancing transactions and the early pay-off by USAir of an affiliate's third party debt, both discussed above, the Company's subsidiaries made scheduled debt repayments of approximately $61.5 million during the first nine months of 1996. USAir also incurred new debt of $26.1 million associated with progress payments for Boeing 757-200 aircraft (see "Other Information" above for recent developments concerning Boeing). The $26.1 million is reflected as non-cash activity in the Company's Condensed Consolidated Statements of Cash Flows because USAir incurred the related debt in conjunction with the payment of the progress payments. On October 25, 1996, the Company paid dividends of $40.0 million on its outstanding Senior Preferred Stock. The Company also paid dividends of $43.0 million on its outstanding Senior Preferred Stock during August 1996. See "Payment of Dividends on Senior Preferred Stock" above for additional information. As of September 30, 1996, USAir Group's ratio of current assets to current liabilities was approximately 0.77 to 1 and the debt component of USAir Group's capitalization structure was greater than 100% (and also greater than 100% if the three series of mandatorily redeemable preferred stock are considered to be debt) due to a deficit in stockholders' equity. Certain information contained in this report should be considered "forward-looking information". Forward-looking information requires the Company to make estimates of future revenues, expenses, activity levels and economic and markets conditions, among other factors. Some of these factors, such as aviation fuel costs and general economic conditions, are outside of the Company's control. The Company's estimates are subject to change. Actual results experienced by the Company may differ from the Company's estimates. The Company assumes no obligation to update such estimates to reflect actual results, changes in assumptions or changes in other factors affecting such estimates. (this space intentionally left blank) 33 Part II. Other Information Item 1. Legal Proceedings In February 1995, thirty-nine class action antitrust cases were filed against seven air carriers, including USAir, on behalf of travel agents and the American Society of Travel Agents in connection with the imposition of a cap on commissions paid to travel agents for ticket sales. On September 3, 1996, USAir entered into a settlement agreement with the plaintiffs under which USAir agreed to pay $9.8 million without any change in its commission policy and without any admission of liability or wrongdoing. All other defendant air carriers also settled. An order granting preliminary approval of the settlements was issued on September 9, 1996 and notices of the settlements have been distributed to plaintiff class members. A fairness hearing to determine whether the settlements should be finally approved is scheduled for November 15, 1996. On September 19, 1996, USAir paid approximately $119,056 into various escrow accounts pursuant to the terms of a Consent Decree it entered into, along with several other companies, in an environmental action brought by the United States for cleanup of a superfund site in Moira, New York. USAir has now substantially complied with its obligations under the Consent Decree. USAir has reached an agreement in principle with Massport to pay approximately $300,000 in cash, and to undertake certain remedial activities in connection with its operations of the hydrant fuel system and associated airport fueling operations in the vicinity of Terminal B at Boston's Logan International Airport. Massport has claims pending with all tenants at the airport. To date, several other carriers have settled their claims. Item 3. Defaults Upon Senior Securities On October 25, 1996, the Company paid dividends of $40.0 million on its outstanding Senior Preferred Stock. The Company also paid dividends of $43.0 million on its outstanding Senior Preferred Stock during August 1996. Prior to the August 1996 dividend payment, the Company had deferred the payment of dividends on all of its outstanding preferred stock issuances effective with dividend payments due September 30, 1994. The Company's capital surplus as of September 30, 1996, as calculated in accordance with Delaware General Corporation Law based on the Company's Condensed Consolidated Balance Sheets (which are contained in Part I, Item 1A of this report), was $33.1 million. This surplus amount is after the effect of the October dividend payment, which was accrued for payment as of September 30, 1996. The Company's outstanding Series B Preferred Stock is junior to the Company's Senior Preferred Stock and is not eligible to receive dividends until the deferred dividends on the Senior Preferred Stock are paid in full and all Senior Preferred Stock dividend payments are current. There can be no assurance of when or if the Company's Board of Directors will declare additional dividends on the Company's outstanding capital stock. 34 The redemption value of the Series A Preferred Stock at September 30, 1996 was $417.2 million (face amount of $358.0 million plus deferred dividends and interest thereon of $59.2 million). The redemption values of the Series F and Series T Preferred Stock at September 30, 1996 were $331.4 million (face amount of $300.0 million plus deferred dividends and interest thereon of $31.4 million) and $110.0 million (face amount of $100.7 million plus deferred dividends and interest thereon of $9.3 million), respectively. The liquidation preference of the Series B Preferred Stock was $250.5 million (face amount of $213.2 million plus deferred dividends of $37.3 million) at September 30, 1996. The aformention redemption values/liquidation preference are as of September 30, 1996, and therefore do not reflect the October 1996 dividend payment. The outstanding issues of preferred stock are the: Series A Preferred Stock owned by affiliates of Berkshire Hathaway, Inc.; Series F Preferred Stock and Series T Preferred Stock both owned by an affiliate of British Airways Plc; and the Series B Preferred Stock which is publicly held. Item 5. Other Information On April 25, 1996, the International Association of Machinists and Aerospace Workers ("IAM") and the Communications Workers of America ("CWA") filed applications with the National Mediation Board ("NMB") requesting that an election be held among USAir's passenger service employees, a class or craft of approximately 10,000 workers, seeking to unionize this group of employees. On November 12, 1996, the NMB issued a decision holding that the CWA, but not the IAM, had submitted a sufficient number of authorization cards to warrant an election. USAir is proceeding with the election process and cannot predict the outcome of the election. Item 6. Exhibits and Reports on Form 8-K A. Exhibits Designation Description 11 Computation of Primary and Fully-Diluted Earnings Per Share for the three months and nine months ended September 30, 1996 and 1995 for USAir Group, Inc. 27.1 Financial Data Schedule - USAir Group, Inc. 27.2 Financial Data Schedule - USAir, Inc. 99 Select Airline Operating and Financial Statistics for the three months and nine months ended September 30, 1996 and 1995 for USAir, Inc. 35 B. Reports on Form 8-K Date of Report Subject of Report October 21, 1996 News Release dated October 21, 1996 of USAir Group, Inc. and USAir, Inc., with consolidated statements of operations for both companies for the three months and nine months ended September 30, 1996 and 1995 and select operating and financial statistics for USAir, Inc. for the same periods. October 24, 1996 News Release dated October 24, 1996 of USAir Group, Inc. and USAir, Inc., announcing USAir's notice to British Airways Plc that USAir was terminating its Code Share Agreement with British Airways Plc effective as of March 29, 1997. (this space intentionally left blank) 36 Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. USAir Group, Inc. (Registrant) Date: November 13, 1996 By: /s/ James A. Hultquist ---------------------- James A. Hultquist Controller (Principal Accounting Officer) USAir, Inc. (Registrant) Date: November 13, 1996 By: /s/ James A. Hultquist ---------------------- James A. Hultquist Controller (Principal Accounting Officer) 37 EX-11 2 USAir Group, Inc. Exhibit 11 Computation of Primary and Fully Diluted Earnings Per Share ("EPS") (unaudited) (in thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ----------------------- 1996 1995 1996 1995 --------- --------- --------- --------- Adjustments to Net Income (Loss) - -------------------------------------------------- Net income $ 67,738 $ 43,056 $236,220 $ 59,033 Preferred dividend requirement (22,338) (21,415) (67,134) (63,044) --------- --------- --------- --------- Net income (loss) applicable to common stock and common stock equivalents used for primary computation 45,400 21,641 169,086 (4,011) Fully diluted adjustments: Assume conversion of preferred stock: Preferred dividend requirement 22,338 a) 21,415 b) 67,134 a) 63,044 b) --------- --------- --------- --------- Adjusted net income (loss) applicable to common stock assuming full dilution $ 67,738 $ 43,056 $236,220 $ 59,033 ========= ========= ========= ========= Adjustments to Common Shares Outstanding - -------------------------------------------------- Average number of shares of common stock 64,213 62,472 63,947 62,143 Primary adjustments Incremental shares from the 1984, 1992, and 1996 Plans' outstanding stock options using the treasury stock method 1,625 99 1,510 - c) --------- --------- --------- --------- Total average number of common and common equivalent shares used for primary computation 65,838 62,571 65,457 62,143 ========= ========= ========= =========
(continued on next page) USAir Group, Inc. Exhibit 11 Computation of Primary and Fully Diluted Earnings Per Share ("EPS") (unaudited) (in thousands, except per share amounts) (Continued)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ----------------------- 1996 1995 1996 1995 -------- -------- -------- --------- Average number of shares of common stock 64,213 62,472 63,947 62,143 Fully diluted adjustments Incremental shares from the 1984, 1992, and 1996 Plans' outstanding stock options using the treasury stock method 1,625 136 1,510 136 d) Assume conversion of preferred stock 39,156 a) 39,156 b) 39,156 a) 39,156 b) -------- -------- -------- --------- Total average number of common shares to be outstanding after full conversion 104,994 101,764 104,613 101,435 ======== ======== ======== ========= Income (Loss) Per Common Share - --------------------------------------------- Primary income (loss) per common share $ 0.69 $ 0.35 $ 2.58 $ (0.06) ======== ======== ======== ========= Fully diluted income (loss) per common share $ 0.65 $ 0.42 $ 2.26 $ 0.58 ======== ======== ======== ========= a) Inclusion of the effects of assuming conversion of USAir Group, Inc. ("USAir Group") Series A Preferred Stock is antidilutive but included in accordance with Regulation S-K Item 601(b)(11). b) Inclusion of the effects of assuming conversion of USAir Group's Series A, B, F, and T Preferred Stock is antidilutive but included in accordance with Regulation S-K item 601(b)(11). c) The incremental shares that are a result of assuming exercise of stock options using the treasury stock method are antidilutive and excluded from the calculation of primary earnings per share. d) The incremental shares that are a result of assuming exercise of stock options using the treasury stock method are antidilutive but included in accordance with Regulation S-K item 601(b)(11).
EX-27 3
5 0000701345 USAIR GROUP, INC. 1,000 9-MOS DEC-31-1996 SEP-30-1996 655,447 631,114 410,293 0 250,600 2,085,489 6,431,580 2,464,772 7,371,828 2,741,413 2,625,790 758,719 213,153 64,216 (938,776) 7,371,828 0 6,090,476 0 5,702,393 0 0 201,409 254,796 18,576 236,220 0 0 0 236,220 2.58 2.15 Receivables are presented net of allowances.
EX-27 4
5 0000714560 USAIR, INC. 1,000 9-MOS DEC-31-1996 SEP-30-1996 653,893 631,114 417,097 0 217,535 2,044,030 6,177,189 2,377,058 7,289,051 2,944,345 2,624,801 0 0 1 (177,489) 7,289,051 0 5,657,269 0 5,362,845 0 0 213,323 149,125 15,440 133,685 0 0 0 133,685 0 0 Receivables are presented net of allowances. EPS calculations are not relevant because USAir, Inc. is a wholly-owned subsidiary of USAir Group, Inc.
EX-99 5 USAir, Inc. Exhibit 99 Select Airline Operating and Financial Statistics (Note 1.) (unaudited)
Three Months Ended September 30, Nine Months Ended September 30, Increase Increase 1996 1995 (Decrease) 1996 1995 (Decrease) ------- ------- ---------- ------- ------- ---------- Revenue passengers (thousands) * 14,329 14,020 2.2% 42,228 42,986 (1.8)% Total revenue passenger miles ("RPMs") (millions) (Note 2.) 10,267 9,711 5.7% 29,186 29,024 0.6% Revenue passenger miles (millions) (Note 2.) * 10,201 9,592 6.3% 28,955 28,658 1.0% Total available seat miles ("ASMs") (millions) (Note 3.) 14,685 14,560 0.9% 42,491 44,955 (5.5)% Available seat miles (millions) (Note 3.) * 14,610 14,428 1.3% 42,225 44,549 (5.2)% Passenger load factor (Note 4.) * 69.8% 66.5% 3.3 pts. 68.6% 64.3% 4.3 pts. Break even load factor (Note 5.) 68.8% 66.2% 2.6 pts. 67.6% 64.8% 2.8 pts. Passenger revenue per ASM (Note 6.) * 11.90c 10.82c 10.0% 12.06c 10.60c 13.8% Total revenue per ASM (Note 7.) 13.10c 11.86c 10.5% 13.28c 11.59c 14.6% Cost per ASM (Note 8.) 12.44c 11.40c 9.1% 12.66c 11.26c 12.4% Yield (Note 9.) * 17.05c 16.28c 4.7% 17.59c 16.49c 6.7% Cost of aviation fuel per gallon (Note 10.) 63.21c 52.84c 19.6% 61.28c 52.53c 16.7% Gallons of aviation fuel consumed (millions) 282 278 1.4% 824 869 (5.2)% * = Denotes scheduled service only (excludes charter service). c = Cents
(continued on next page) USAir, Inc. Exhibit 99 Select Airline Operating and Financial Statistics (unaudited) (Continued) Note 1. Operating statistics exclude flights operated by USAir, Inc. ("USAir") under a wet lease arrangement with British Airways Plc ("wet lease"). The wet lease arrangement expired May 31, 1996. Operating statistics include free frequent travelers and the related miles flown. Financial statistics exclude the revenue and expense (which amounts net to zero) generated under the wet lease arrangement and non-recurring items. Wet lease amounts of $12.6 million, $16.2 million and $47.6 million have been excluded from year-to-date results for 1996, third quarter results for 1995 and year-to-date results for 1995, respectively, from both Other Operating Revenues and Other Operating Expenses for purposes of financial statistic calculation. No non-recurring items are included in USAir's results for the third quarter of 1996, the third quarter of 1995 or for the first nine months of 1995. USAir's year-to-date 1996 results include non-recurring expense credits of $29.5 million related to its non-operating BAe-146 aircraft. Note 2. Revenue passengers multiplied by the number of miles they flew. Note 3. Seats available multiplied by the number of miles flown (a measure of capacity). Note 4. Percentage of aircraft seating capacity that is actually utilized (RPMs/ASMs). Note 5. Percentage of aircraft seating capacity that must be utilized, based on fares in effect during the period, for USAir to break even at the pretax income level. Note 6. Passenger Transportation revenue divided by ASMs (a measure of unit revenue). Note 7. Total Operating Revenues divided by ASMs (a measure of unit revenue). Note 8. Total Operating Expenses divided by ASMs (a measure of unit cost). Note 9. Passenger Transportation revenue divided by RPMs (a measure of unit revenue). Note 10. Includes the base cost of aviation fuel and transportation charges. -----END PRIVACY-ENHANCED MESSAGE-----